QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended December 31, 2013

OR

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-434

THE PROCTER & GAMBLE COMPANY

(Exact name of registrant as specified in its charter)

Ohio

31-0411980

(State of Incorporation)

(I.R.S. Employer Identification Number)

One Procter & Gamble Plaza, Cincinnati, Ohio

45202

(Address of principal executive offices)

(Zip Code)

(513) 983-1100

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated filer þ Accelerated filer o Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

There were 2,711,408,161 shares of Common Stock outstanding as of December 31, 2013.

Less: Total comprehensive income attributable to noncontrolling interests

50

21

85

69

TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO PROCTER & GAMBLE

$

3,787

$

4,540

$

7,577

$

8,499

See accompanying Notes to Consolidated Financial Statements.

THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

Amounts in millions

December 31, 2013

June 30, 2013

ASSETS

CURRENT ASSETS

Cash and cash equivalents

$6,929

$5,947

Available-for-sale investment securities

1,574

—

Accounts receivable

6,911

6,508

Inventories

Materials and supplies

1,974

1,704

Work in process

686

722

Finished goods

4,719

4,483

Total inventories

7,379

6,909

Deferred income taxes

1,173

948

Prepaid expenses and other current assets

3,501

3,678

TOTAL CURRENT ASSETS

27,467

23,990

PROPERTY, PLANT AND EQUIPMENT, NET

22,152

21,666

GOODWILL

56,293

55,188

TRADEMARKS AND OTHER INTANGIBLE ASSETS, NET

31,595

31,572

OTHER NONCURRENT ASSETS

5,420

6,847

TOTAL ASSETS

$

142,927

$

139,263

LIABILITIES AND SHAREHOLDERS’ EQUITY

CURRENT LIABILITIES

Accounts payable

$7,156

$8,777

Accrued and other liabilities

9,480

8,828

Debt due within one year

14,091

12,432

TOTAL CURRENT LIABILITIES

30,727

30,037

LONG-TERM DEBT

21,517

19,111

DEFERRED INCOME TAXES

10,809

10,827

OTHER NONCURRENT LIABILITIES

9,736

10,579

TOTAL LIABILITIES

72,789

70,554

SHAREHOLDERS’ EQUITY

Preferred stock

1,125

1,137

Common stock – shares issued –

December 2013

4,009.2

June 2013

4,009.2

4,009

4,009

Additional paid-in capital

63,726

63,538

Reserve for ESOP debt retirement

(1,348

)

(1,352

)

Accumulated other comprehensive income/(loss)

(6,366

)

(7,499

)

Treasury stock

(75,048

)

(71,966

)

Retained earnings

83,280

80,197

Noncontrolling interest

760

645

TOTAL SHAREHOLDERS’ EQUITY

70,138

68,709

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

$

142,927

$

139,263

See accompanying Notes to Consolidated Financial Statements.

THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Six Months Ended December 31

Amounts in millions

2013

2012

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

$

5,947

$

4,436

OPERATING ACTIVITIES

Net earnings

6,529

6,929

Depreciation and amortization

1,526

1,448

Share-based compensation expense

153

154

Deferred income taxes

(126

)

18

Gain on purchase/sale of businesses

(5

)

(902

)

Changes in:

Accounts receivable

(376

)

(914

)

Inventories

(446

)

(324

)

Accounts payable, accrued and other liabilities

(1,191

)

(288

)

Other operating assets and liabilities

(859

)

556

Other

138

(58

)

TOTAL OPERATING ACTIVITIES

5,343

6,619

INVESTING ACTIVITIES

Capital expenditures

(1,663

)

(1,529

)

Proceeds from asset sales

15

474

Acquisitions, net of cash acquired

1

(1,123

)

Change in other investments

(149

)

(179

)

TOTAL INVESTING ACTIVITIES

(1,796

)

(2,357

)

FINANCING ACTIVITIES

Dividends to shareholders

(3,409

)

(3,206

)

Change in short-term debt

(429

)

4,972

Additions to long-term debt

4,271

2,239

Reductions of long-term debt

(3

)

(3,749

)

Treasury stock purchases

(4,004

)

(3,984

)

Impact of stock options and other

937

1,662

TOTAL FINANCING ACTIVITIES

(2,637

)

(2,066

)

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS

72

11

CHANGE IN CASH AND CASH EQUIVALENTS

982

2,207

CASH AND CASH EQUIVALENTS, END OF PERIOD

$

6,929

$

6,643

See accompanying Notes to Consolidated Financial Statements.

THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

These statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2013 and the Form 8-K filed October 28, 2013 to update the Form 10-K for a change to our reportable segments that was effective July 1, 2013. In the opinion of management, the accompanying unaudited Consolidated Financial Statements of The Procter & Gamble Company and subsidiaries (the "Company," "Procter & Gamble," "we" or "our") contain all adjustments necessary to present fairly the financial position, results of operations and cash flows for the interim periods reported. However, the results of operations included in such financial statements may not necessarily be indicative of annual results.

2. New Accounting Pronouncements and Policies

No new accounting pronouncement issued or effective during the fiscal year had or is expected to have a material impact on the Consolidated Financial Statements.

3. Segment Information

Effective July 1, 2013, the Company implemented a number of changes to our GBU structure, which resulted in changes to our reportable segments. We organized our Global Business Units (GBUs) into four industry-based sectors comprised of 1) Global Beauty, 2) Global Health and Grooming, 3) Global Fabric and Home Care, and 4) Global Baby, Feminine and Family Care. Under U.S. GAAP, the GBUs underlying these sectors will be aggregated into five reportable segments: 1) Beauty, 2) Grooming, 3) Health Care, 4) Fabric Care and Home Care, and 5) Baby, Feminine and Family Care. As a result of the organizational changes, Feminine Care transitioned from Health Care to Baby, Feminine and Family Care, and Pet Care transitioned from Fabric Care and Home Care to Health Care. Prior periods have been recast to reflect the change.

Following is a summary of segment results.

Three Months Ended December 31

Six Months Ended December 31

Net Sales

Earnings Before Income Taxes

Net Earnings

Net Sales

Earnings Before Income Taxes

Net Earnings

Beauty

2013

$

5,284

$

1,160

$

927

$

10,187

$

2,069

$

1,617

2012

5,403

1,138

877

10,343

1,990

1,535

Grooming

2013

2,118

730

553

4,074

1,331

1,006

2012

2,119

695

518

4,126

1,329

984

Health Care

2013

2,574

536

377

4,880

934

644

2012

2,470

501

350

4,792

987

671

Fabric Care and Home Care

2013

6,851

1,344

877

13,551

2,642

1,734

2012

6,785

1,338

879

13,288

2,665

1,756

Baby, Feminine and Family Care

2013

5,603

1,142

765

11,106

2,263

1,490

2012

5,557

1,219

800

10,805

2,342

1,524

Corporate

2013

(150

)

(481

)

(27

)

(313

)

(796

)

38

2012

(159

)

327

652

(440

)

(269

)

459

Total

2013

$

22,280

$

4,431

$

3,472

$

43,485

$

8,443

$

6,529

2012

22,175

5,218

4,076

42,914

9,044

6,929

4. Goodwill and Other Intangible Assets

Goodwill is allocated by reportable segment as follows.

Amounts in millions of dollars unless otherwise specified.

Beauty

Grooming

Health Care

Fabric Care and Home Care

Baby, Feminine and Family Care

Corporate

Total Company

GOODWILL at June 30, 2013

$

16,663

$

20,617

$

8,318

$

4,453

$

4,828

$

309

$

55,188

Translation and Other

425

392

121

67

100

—

1,105

GOODWILL at December 31, 2013

$

17,088

$

21,009

$

8,439

$

4,520

$

4,928

$

309

$

56,293

Goodwill increased from June 30, 2013, due to currency translation across all reportable segments.

Identifiable intangible assets at December 31, 2013 are comprised of:

Gross Carrying Amount

Accumulated Amortization

Intangible assets with determinable lives

$

9,853

$

5,244

Intangible assets with indefinite lives

26,986

—

Total identifiable intangible assets

$

36,839

$

5,244

Intangible assets with determinable lives consist of brands, patents, technology and customer relationships. The intangible assets with indefinite lives consist primarily of brands. The amortization of intangible assets for the three months ended December 31, 2013 and 2012 was $129 million and $125 million, respectively. For the six months ended December 31, 2013 and 2012, the amortization of intangibles was $263 million and $253 million, respectively.

The results of our annual goodwill impairment testing, which took place during the quarter ended December 31, 2013, indicated a decline in the fair value of the Batteries reporting unit due to lower long-term market growth assumptions in certain key geographies. The estimated fair value of Batteries continues to exceed its underlying carrying value, but the excess has been reduced to approximately 6%. The business unit valuations used to test goodwill for impairment are dependent on a number of significant estimates and assumptions, including macroeconomic conditions, overall category growth rates, competitive activities, cost containment and margin expansion and Company business plans. We believe these estimates and assumptions are reasonable. However, actual events and results of the Batteries reporting unit could differ substantially from those used in our valuations. To the extent such factors result in a further reduction of the level of projected cash flows used to estimate the Batteries reporting unit fair value, we may need to record non-cash impairment charges in the future.

5. Share-Based Compensation

Total share-based compensation expense was as follows:

Three Months Ended December 31

Six Months Ended December 31

2013

2012

2013

2012

Stock options

$

47

$

62

$

106

$

116

Other share-based awards

22

13

47

38

Total share-based compensation

$

69

$

75

$

153

$

154

Assumptions utilized in the model that estimates the fair value of share-based awards for purposes of calculating compensation expense are evaluated and revised, as necessary, to reflect market conditions and experience.

6. Postretirement Benefits

The Company offers various postretirement benefits to its employees.

The components of net periodic benefit cost for defined benefit plans are as follows:

Amounts in millions of dollars unless otherwise specified.

Pension Benefits

Other Retiree Benefits

Three Months Ended December 31

Three Months Ended December 31

2013

2012

2013

2012

Service cost

$

74

$

76

$

38

$

48

Interest cost

148

141

64

66

Expected return on plan assets

(176

)

(148

)

(97

)

(96

)

Prior service cost / (credit) amortization

7

6

(5

)

(5

)

Net actuarial loss amortization

54

53

30

50

Curtailment loss

—

2

—

—

Gross benefit cost

107

130

30

63

Dividends on ESOP preferred stock

—

—

(16

)

(18

)

Net periodic benefit cost

$

107

$

130

$

14

$

45

Pension Benefits

Other Retiree Benefits

Six Months Ended December 31

Six Months Ended December 31

2013

2012

2013

2012

Service cost

$

147

$

150

$

75

$

95

Interest cost

291

281

128

130

Expected return on plan assets

(346

)

(296

)

(193

)

(191

)

Prior service cost / (credit) amortization

13

9

(10

)

(10

)

Net actuarial loss amortization

106

106

59

100

Curtailment loss

—

2

—

—

Gross benefit cost

211

252

59

124

Dividends on ESOP preferred stock

—

—

(32

)

(35

)

Net periodic benefit cost

$

211

$

252

$

27

$

89

For the year ending June 30, 2014, the expected return on plan assets is 7.2% and 8.3% for pensions and other retiree benefit plans, respectively.

7. Risk Management Activities and Fair Value Measurements

As a multinational company with diverse product offerings, we are exposed to market risks, such as changes in interest rates, currency exchange rates and commodity prices.

Fair Value Hierarchy

The Company has not changed its valuation techniques in measuring the fair value of any financial assets and liabilities during the period. The following table sets forth the Company’s financial assets and liabilities as of December 31, 2013 and June 30, 2013 that are measured at fair value on a recurring basis during the period, segregated by level within the fair value hierarchy:

Amounts in millions of dollars unless otherwise specified.

Level 1

Level 2

Level 3

Total

December 31, 2013

June 30, 2013

December 31, 2013

June 30, 2013

December 31, 2013

June 30, 2013

December 31, 2013

June 30, 2013

Assets recorded at fair value:

Investments:

U.S. government securities

$

—

$

—

$

1,574

$

1,571

$

—

$

—

$

1,574

$

1,571

Other investments

8

23

—

—

25

24

33

47

Derivatives relating to:

Foreign currency hedges

—

—

219

168

—

—

219

168

Other foreign currency instruments (1)

—

—

31

19

—

—

31

19

Interest rates

—

—

136

191

—

—

136

191

Net investment hedges

—

—

133

233

—

—

133

233

Total assets recorded at fair value (2)

8

23

2,093

2,182

25

24

2,126

2,229

Liabilities recorded at fair value:

Derivatives relating to:

Foreign currency hedges

—

—

—

—

—

—

—

—

Other foreign currency instruments (1)

—

—

76

90

—

—

76

90

Interest rates

—

—

117

59

—

—

117

59

Net investment hedges

—

—

—

—

—

—

—

—

Liabilities recorded at fair value (3)

—

—

193

149

—

—

193

149

Liabilities not recorded at fair value:

Long-term debt (4)

26,275

22,671

3,626

3,022

—

—

29,901

25,693

Total liabilities recorded and not recorded at fair value

$

26,275

$

22,671

$

3,819

$

3,171

$

—

$

—

$

30,094

$

25,842

(1)

Other foreign currency instruments are comprised of foreign currency financial instruments that do not qualify as hedges.

(2)

All derivative assets are presented in prepaid expenses and other current assets and other noncurrent assets. Investment securities are presented in available-for-sale investment securities and other noncurrent assets. The U.S government securities are included in other noncurrent assets in our Consolidated Balance Sheet at June 30, 2013. The amortized cost of the U.S. government securities was $1,604 as of December 31, 2013 and June 30, 2013. All U.S. government securities have contractual maturities between one and five years. Fair values are generally estimated based upon quoted market prices for similar instruments.

(3)

All liabilities are presented in accrued and other liabilities or other noncurrent liabilities.

(4)

Long-term debt includes the current portion ($6,521 and $4,540 as of December 31, 2013 and June 30, 2013, respectively) of debt instruments. Long-term debt is not recorded at fair value on a recurring basis, but is measured at fair value for disclosure purposes. Fair values are generally estimated based on quoted market prices for identical or similar instruments.

The Company recognizes transfers between levels within the fair value hierarchy, if any, at the end of each quarter. There were no transfers between levels during the periods presented. Also, there was no significant activity within the Level 3 assets and liabilities during the periods presented and there were no assets or liabilities that were remeasured at fair value on a non-recurring basis for the period ended December 31, 2013.

Substantially all of the Company’s financial instruments used in hedging transactions are governed by industry standard netting agreements with counterparties. If the Company’s credit rating were to fall below the levels stipulated in the agreements, the counterparties could demand either collateralization or termination of the arrangement. The aggregate fair value of the instruments covered by these contractual features that are in a net liability position as of December 31, 2013, was not material. The Company has not been required to post any collateral as a result of these contractual features.

Disclosures about Derivative Instruments

The notional amounts and fair values of qualifying and non-qualifying financial instruments used in hedging transactions as of December 31, 2013 and June 30, 2013 are as follows:

The effective portion of gains and losses on derivative instruments that was recognized in other comprehensive income (OCI) during the six months ended December 31, 2013 and 2012, was not material. During the next 12 months, the amount of the December 31, 2013 accumulated OCI (AOCI) balance that will be reclassified to earnings is expected to be immaterial.

The amounts of gains and losses on qualifying and non-qualifying financial instruments used in hedging transactions for the three and six months ended December 31, 2013 and 2012 are as follows:

Amounts in millions of dollars unless otherwise specified.

Amount of Gain/(Loss) Reclassified from Accumulated OCI into Income (1)

Three Months Ended December 31

Six Months Ended December 31

2013

2012

2013

2012

Derivatives in Cash Flow Hedging Relationships

Interest rate contracts

$

1

$

1

$

3

$

3

Foreign currency contracts

58

106

56

88

Total

$

59

$

107

$

59

$

91

Amount of Gain/(Loss) Recognized in Income

Three Months Ended December 31

Six Months Ended December 31

2013

2012

2013

2012

Derivatives in Fair Value Hedging Relationships(2)

Interest rate contracts

$

(84

)

$

(15

)

(113

)

25

Debt

84

17

113

(21

)

Total

—

2

—

4

Derivatives in Net Investment Hedging Relationships (2)

Net investment hedges

$

—

$

(1

)

$

—

$

(1

)

Derivatives Not Designated as Hedging Instruments (3)

Foreign currency contracts (4)

$

(26

)

$

(53

)

$

83

$

226

Commodity contracts

—

(2

)

—

—

Total

$

(26

)

$

(55

)

$

83

$

226

(1)

The gain or loss on the effective portion of cash flow hedging relationships is reclassified from AOCI into net income in the same period during which the related item affects earnings. Such amounts are included in the Consolidated Statements of Earnings as follows: interest rate contracts in interest expense, foreign currency contracts in selling, general and administrative expense (SG&A) and interest expense and commodity contracts in cost of products sold.

(2)

The gain or loss on the ineffective portion of interest rate contracts and net investment hedges, if any, is included in the Consolidated Statements of Earnings in interest expense.

(3)

The gain or loss on contracts not designated as hedging instruments is included in the Consolidated Statements of Earnings as follows: foreign currency contracts in SG&A and commodity contracts in cost of products sold.

(4)

The gain or loss on non-qualifying foreign currency contracts substantially offsets the foreign currency mark-to-market impact of the related exposure.

8. Accumulated Other Comprehensive Income / (Loss)

The tables below present the changes in accumulated other comprehensive income / (loss) by component and the reclassifications out of accumulated other comprehensive income / (loss).

Changes in Accumulated Other Comprehensive Income / (Loss) by Component

(1) See Note 7 for classification of these items in the Consolidated Statement of Earnings.

(2) Reclassified from AOCI into Other non-operating income, net.

(3) Reclassified from AOCI into costs of products sold and SG&A. These components are included in the computation of net periodic pension cost (see Note 6 for additional details).

9. Restructuring Program

The Company has historically incurred an ongoing annual level of restructuring-type activities to maintain a competitive cost structure, including manufacturing and workforce optimization. Before-tax costs incurred under the ongoing program have generally ranged from $250 to $500 million annually. In February and November 2012, the Company made announcements regarding an incremental restructuring program as part of a productivity and cost savings plan to reduce costs in the areas of supply chain, research and development, marketing and overheads. The productivity and cost savings plan was designed to accelerate cost reductions by streamlining management decision making, manufacturing and other work processes in order to help fund the Company's growth strategy. The restructuring program is being executed across the Company's centralized organization as well as across virtually all of its Market Development Organization (MDO) and GBUs.

The Company expects to incur in excess of $3.5 billion in before-tax restructuring costs over a five year period (from fiscal 2012 through fiscal 2016), including costs incurred as part of the ongoing and incremental restructuring program. The restructuring program included an initial net reduction in non-manufacturing overhead personnel of approximately 5,700 by the end of fiscal 2013. In addition to the initial reduction of 5,700 employees, the restructuring program includes plans for a further non-manufacturing overhead personnel reduction of approximately 2% - 4% annually from fiscal 2014 through fiscal 2016, roughly doubling the size of the initial enrollment reduction target. This is being done via the elimination of duplicate work, simplification through the use of technology and the optimization of various functional and business organizations and the Company's global footprint. In addition, the plan includes integration of newly acquired companies and the optimization of the supply chain and other manufacturing processes.

Restructuring costs incurred consist primarily of costs to separate employees and asset-related costs to exit facilities. The Company is also incurring other types of costs as outlined below. Through fiscal 2013, the Company incurred charges of

Amounts in millions of dollars unless otherwise specified.

approximately $2.0 billion. Approximately $1.1 billion of these charges were related to separations, $487 million were asset-related and $431 million were related to other restructuring-type costs. Through fiscal 2013, the Company reduced non-manufacturing enrollment by approximately 7,000, which was 1,300 positions above initial target.

For the three- and six-month periods ended December 31, 2013, the Company incurred total restructuring charges of approximately $173 million and $302 million, respectively. For the three- and six-month periods ended December 31, 2013 approximately $101 million and $149 million of these charges were recorded in SG&A, respectively. The remainder is included in cost of products sold. The following table presents restructuring activity for the six months ended December 31, 2013:

For the Six Months Ended December 31, 2013

Accrual Balance June 30, 2013

Charges Previously Reported (Three Months Ended September 30, 2013)

Charges for the Three Months Ended December 31, 2013

Cash Spent

Charges Against Assets

Accrual Balance December 31, 2013

Separations

$

296

$

53

$

74

$

(79

)

$

—

$

344

Asset-Related Costs

—

53

13

—

(66

)

—

Other Costs

27

23

86

(116

)

—

20

Total

$

323

$

129

$

173

$

(195

)

$

(66

)

$

364

Separation Costs

Employee separation charges for the three- and six-month periods ended December 31, 2013 relate to severance packages for approximately 440 and 670 employees, respectively. Separations related to non-manufacturing employees were approximately 310 and 480 for the three- and six-month periods ended December 31, 2013, respectively. These separations are primarily in North America and Western Europe. The packages are predominately voluntary and the amounts are calculated based on salary levels and past service periods. Severance costs related to voluntary separations are generally charged to earnings when the employee accepts the offer. Since its inception, the restructuring program has incurred separation charges related to approximately 7,420 employees, of which approximately 5,120 are non-manufacturing overhead personnel.

Asset-Related Costs

Asset-related costs consist of both asset write-downs and accelerated depreciation. Asset write-downs relate to the establishment of a new fair value basis for assets held-for-sale or disposal. These assets were written down to the lower of their current carrying basis or amounts expected to be realized upon disposal, less minor disposal costs. Charges for accelerated depreciation relate to long-lived assets that will be taken out of service prior to the end of their normal service period. These assets relate primarily to manufacturing consolidations and technology standardization. The asset-related charges will not have a significant impact on future depreciation charges.

Other Costs

Other restructuring-type charges are incurred as a direct result of the restructuring program. Such charges primarily include employee relocation related to separations and office consolidations, termination of contracts related to supply chain redesign and the cost to change internal systems and processes to support the underlying organizational changes.

Consistent with our historical policies for ongoing restructuring-type activities, the restructuring program charges are funded by and included within Corporate for both management and segment reporting. Accordingly, all of the charges under the program are included within the Corporate reportable segment. However, for informative purposes, the following table summarizes the total restructuring costs related to our reportable segments.

The Company is subject to various legal proceedings and claims arising out of our business which cover a wide range of matters such as antitrust, trade and other governmental regulations, product liability, patent and trademark matters, advertising, contracts, environmental issues, labor and employment matters and income taxes.

As previously disclosed, the Company has had a number of antitrust matters in Europe. These matters involve a number of other consumer products companies and/or retail customers. Several regulatory authorities in Europe have issued separate decisions pursuant to their investigations alleging that the Company, along with several other companies, engaged in violations of competition laws in those countries. The Company has accrued the assessed fines for each of the decisions, of which all but $17 million has been paid as of December 31, 2013. Some of those are on appeal. As a result of our initial and on-going analyses of other formal complaints, the Company has accrued liabilities for competition law violations totaling $155 million as of December 31, 2013. While the ultimate resolution of these matters for which we have accrued liabilities may result in fines or costs in excess of the amounts reserved, it is difficult to estimate such amounts at this time. Currently, however, we do not expect any such incremental losses to materially impact our financial statements in the period in which they are accrued and paid, respectively.

With respect to other litigation and claims, while considerable uncertainty exists, in the opinion of management and our counsel, the ultimate resolution of the various lawsuits and claims will not materially affect our financial position, results of operations or cash flows.

We are also subject to contingencies pursuant to environmental laws and regulations that in the future may require us to take action to correct the effects on the environment of prior manufacturing and waste disposal practices. Based on currently available information, we do not believe the ultimate resolution of environmental remediation will have a material effect on our financial position, results of operations or cash flows.

Income Tax Uncertainties

The Company is present in approximately 150 taxable jurisdictions and, at any point in time, has 40 – 50 audits underway at various stages of completion. We evaluate our tax positions and establish liabilities for uncertain tax positions that may be challenged by local authorities and may not be fully sustained, despite our belief that the underlying tax positions are fully supportable. Uncertain tax positions are reviewed on an ongoing basis and are adjusted in light of changing facts and circumstances, including progress of tax audits, developments in case law and closing of statutes of limitations. Such adjustments are reflected in the tax provision as appropriate. We have tax years open ranging from 2002 and forward. We are generally not able to reliably estimate the ultimate settlement amounts or timing until the close of the audit. While we do not expect material changes, it is possible that the amount of unrecognized benefit with respect to our uncertain tax positions will significantly increase or decrease within the next 12 months related to audits described above. At this time, we are not able to make a reasonable estimate of the range of impact on the balance of uncertain tax positions or the impact on the effective tax rate related to these items.

Additional information on the Commitments and Contingencies of the Company can be found in Note 11, Commitments and Contingencies, which appears in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2013.

Amounts in millions of dollars unless otherwise specified.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may appear throughout this report, including without limitation, the following sections: “Management's Discussion and Analysis,” and “Risk Factors.” These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section titled "Economic Conditions, Challenges and Risks" and the section titled “Risk Factors” (Part II, Item 1A of this Form 10-Q). We undertake no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events, or otherwise.

The purpose of the Management's Discussion and Analysis (MD&A) is to provide an understanding of Procter & Gamble's financial condition, results of operations and cash flows by focusing on changes in certain key measures from year to year. MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and accompanying notes. MD&A is organized in the following sections:

•

Overview

•

Summary of Results - Six Months Ended December 31, 2013

•

Economic Conditions, Challenges and Risks

•

Results of Operations – Three and Six Months Ended December 31, 2013

•

Business Segment Discussion – Three and Six Months Ended December 31, 2013

•

Financial Condition

•

Reconciliation of Non-GAAP Measures

Throughout MD&A, we refer to measures used by management to evaluate performance, including unit volume growth, net sales and net earnings. We also refer to a number of financial measures that are not defined under accounting principles generally accepted in the United States of America (U.S. GAAP), including organic sales growth, core net earnings per share (EPS), free cash flow and free cash flow productivity. Organic sales growth is net sales growth excluding the impacts of foreign exchange, acquisitions and divestitures. Core EPS is a measure of the Company's diluted net earnings per share from continuing operations excluding certain items that are not judged to be part of the Company's sustainable results or trends. Free cash flow is operating cash flow less capital spending. Free cash flow productivity is the ratio of free cash flow to net earnings. We believe these measures provide investors with important information that is useful in understanding our business results and trends. The explanation at the end of MD&A provides more details on the use and the derivation of these measures.

Management also uses certain market share and market consumption estimates to evaluate performance relative to competition despite some limitations on the availability and comparability of share and consumption information. References to market share and market consumption in MD&A are based on a combination of vendor-reported consumption and market size data, as well as internal estimates. All market share references represent the percentage of sales in dollar terms on a constant currency basis of our products, relative to all product sales in the category.

OVERVIEW

We are a global leader in retail goods focused on providing branded consumer packaged goods of superior quality and value to our consumers around the world. Our products are sold in more than 180 countries and territories primarily through mass merchandisers, grocery stores, membership club stores, drug stores, department stores, salons, high-frequency stores and distributors. We continue to expand our presence in other channels, such as perfumeries and e-commerce. We have on-the-ground operations in approximately 70 countries.

Our market environment is highly competitive with global, regional and local competitors. In many of the markets and industry segments in which we sell our products, we compete against other branded products as well as retailers' private-label brands. Additionally, many of the product segments in which we compete are differentiated by price tiers (referred to as super-

premium, premium, mid-tier and value-tier products). We are well positioned in the industry segments and markets in which we operate, often holding a leadership or significant market share position.

Effective July 1, 2013, the Company implemented a number of changes to our Global Business Unit (GBU) structure, which resulted in changes to our reportable segments. We organized our GBUs into four industry-based sectors comprised of 1) Global Beauty, 2) Global Health and Grooming, 3) Global Fabric and Home Care, and 4) Global Baby, Feminine and Family Care. Under U.S. GAAP, the GBUs underlying these sectors are aggregated into five reportable segments: 1) Beauty, 2) Grooming, 3) Health Care, 4) Fabric Care and Home Care, and 5) Baby, Feminine and Family Care. As a result of the organizational changes, Feminine Care transitioned from Health Care to Baby, Feminine and Family Care, and Pet Care transitioned from Fabric Care and Home Care to Health Care.

The table below provides more information about the components of our reportable business segment structure.

The following table provides the percentage of net sales and net earnings by reportable business segment for the three months ended December 31, 2013 (excludes net sales and net earnings in Corporate):

Three Months Ended December 31, 2013

Net Sales

Net Earnings

Beauty

24%

26%

Grooming

9%

16%

Health Care

11%

11%

Fabric Care and Home Care

31%

25%

Baby, Feminine and Family Care

25%

22%

Total

100%

100%

The following table provides the percentage of net sales and net earnings by reportable business segment for the six months ended December 31, 2013 (excludes net sales and net earnings in Corporate):

Six Months Ended December 31, 2013

Net Sales

Net Earnings

Beauty

23%

25%

Grooming

9%

16%

Health Care

11%

9%

Fabric Care and Home Care

31%

27%

Baby, Feminine and Family Care

26%

23%

Total

100%

100%

SUMMARY OF RESULTS

Following are highlights of results for the six months ended December 31, 2013 versus the six months ended December 31, 2012:

•

Net sales increased 1% versus the previous year to $43.5 billion. Organic sales, which exclude the impacts of acquisitions, divestitures and foreign exchange, were up 3%.

Net earnings attributable to Procter & Gamble were $6.5 billion, a decrease of $416 million, or 6% versus the prior year period. Approximately $340 million of this decrease was driven by non-core items including a $623 million holding gain resulting from P&G's purchase of the balance of its Baby Care and Feminine Care joint venture in Iberia in the prior year period, partially offset by a $260 million after tax reduction in restructuring charges. The remaining decline was driven by reduced gross margin, partially offset by lower selling, general and administrative expenses (SG&A) and a lower effective tax rate.

Core net earnings per share, which excludes incremental restructuring charges, legal charges, charges for pending European legal matters and the base period gain from the joint venture in Iberia, decreased 1% to $2.26.

Ability to Achieve Business Plans. We are a consumer products company and rely on continued demand for our brands and products. To achieve business goals, we must develop and sell products that appeal to consumers and retail trade customers. Our continued success is dependent on leading-edge innovation with respect to both products and operations, the continued positive reputations of our brands and our ability to successfully maintain patent and trademark protection. This means we must be able to obtain patents and trademarks, and respond to technological advances and patents granted to competition. Our success is also dependent on effective sales, advertising and marketing programs. Our ability to innovate and execute in these areas will determine the extent to which we are able to grow existing sales and volume profitably, especially with respect to the product categories and geographic markets (including developing markets) in which we have chosen to focus. There are high levels of competitive activity in the environments in which we operate. To address these challenges, we must respond to competitive factors, including pricing, promotional incentives, trade terms and product initiatives. We must manage each of these factors, as well as maintain mutually beneficial relationships with our key customers, in order to effectively compete and achieve our business plans. As a company that manages a portfolio of consumer brands, our ongoing business model involves a certain level of ongoing acquisition, divestiture and joint venture activities. We must be able to successfully manage the impacts of these activities, while at the same time delivering against base business objectives. Daily conduct of our business also depends on our ability to maintain key information technology systems, including systems operated by third-party suppliers, and to maintain security over our data.

Cost Pressures. Our costs are subject to fluctuations, particularly due to changes in commodity prices, raw materials, labor costs, foreign exchange and interest rates. Therefore, our success is dependent, in part, on our continued ability to manage these fluctuations through pricing actions, cost savings projects, sourcing decisions and certain hedging transactions, as well as through consistent productivity improvements. We also must manage our debt and currency exposure, especially in certain countries with currency exchange, import authorization and pricing controls, such as Venezuela, Argentina, China, India, and Egypt. We need to maintain key manufacturing and supply arrangements, including sole supplier and sole manufacturing plant arrangements, and successfully manage any disruptions at Company manufacturing sites. We must implement, achieve and sustain cost improvement plans, including our outsourcing projects and those related to general overhead and workforce optimization. Successfully managing these changes, including identifying, developing and retaining key employees, is critical to our success.

Global Economic Conditions. Demand for our products has a correlation to global macroeconomic factors. The current macroeconomic factors remain dynamic. Economic changes, terrorist activity, political unrest and natural disasters may result in business interruption, inflation, deflation, lack of market growth or decreased demand for our products. Our success will depend, in part, on our ability to manage continued global political and/or economic uncertainty, especially in our significant geographic markets. We could also be negatively impacted by a global, regional or national economic crisis, including sovereign risk in the event of a deterioration in the credit worthiness of or a default by local governments, resulting in a disruption of credit markets. Such events could negatively impact our ability to collect receipts due from governments, including refunds of value added taxes, create significant credit risks relative to our local customers and depository institutions, and/or negatively impact our overall liquidity.

Regulatory Environment. Changes in laws, regulations and the related interpretations may alter the environment in which we do business. This includes changes in environmental, competitive and product-related laws, as well as changes in accounting standards and taxation requirements. Our ability to manage regulatory, tax and legal matters (including, but not limited to, product liability, patent, intellectual property, competition law matters and tax policy) and to resolve pending legal matters within current estimates may impact our results.

For information on risk factors that could impact our results, please refer to Part II, Item 1A "Risk Factors" in the Company’s Form 10-Q for the quarter ended September 30, 2013.

RESULTS OF OPERATIONS – Three Months Ended December 31, 2013

The following discussion provides a review of results for the three months ended December 31, 2013 versus the three months ended December 31, 2012.

Net sales were flat at $22.3 billion for the second quarter on a 3% increase in unit volume versus the prior year period. Fabric Care and Home Care and Health Care volume grew mid-single digits. Baby, Feminine and Family Care, Grooming and Beauty volume grew low single digits. Volume increased low single digits in developed regions and grew high single digits in developing regions. Unfavorable foreign exchange reduced net sales by 3%. Organic sales grew 3% driven by the unit volume increase. A 1% impact from higher pricing was offset by a 1% impact from unfavorable geographic and product mix due to higher relative growth of developing regions, which have lower than average selling prices, and lower priced product categories.

Net sales percentage changes are approximations based on quantitative formulas that are consistently applied.

* Other includes the sales mix impact from acquisitions/divestitures and rounding impacts necessary to reconcile volume to net sales.

Operating Costs

Gross margin contracted 90 basis points to 50.0% of net sales for the quarter. The decrease in gross margin was driven by a 130 basis point impact from unfavorable geographic and product mix behind disproportionate growth in developing regions, the Fabric Care and Home Care segment, and mid-tier products, which have lower gross margins than the Company average. The gross margin decline was also driven by a 90 basis point impact from unfavorable foreign exchange. These impacts were partially offset by manufacturing cost savings of 130 basis points.

Total selling, general and administrative expenses (SG&A) decreased 3% to $6.6 billion due to a reduction in marketing spending and restructuring spending. SG&A as a percentage of net sales decreased 100 basis points to 29.6%. Overhead productivity savings of 30 basis points and reduced marketing spending, along with approximately 80 basis points of scale benefits from increased net sales on overhead and marketing spending, were partially offset by the impact of foreign exchange and an increase in wages primarily in developing regions.

Non-Operating Expenses and Income

Interest expense was $187 million for the quarter, an increase of $18 million versus the prior year period due to an increase in debt outstanding, partially offset by lower interest rates on floating rate debt. Interest income was $23 million for the quarter, an increase of $4 million versus the prior year due to an increase in cash, cash equivalents and investment securities. Other non-operating income/(expense) decreased $833 million to $43 million primarily due to prior year acquisition and divestiture activities, including a $631 million holding gain resulting from P&G's purchase of the balance of its Baby Care and Feminine Care joint venture in Iberia and a $247 million gain in the prior year from the divestiture of our Italy bleach business.

Income Taxes

The effective tax rate decreased 30 basis points to 21.6%. The prior year rate was reduced by 310 basis points due to the tax impacts on gains from the purchase of the balance of the Baby Care and Feminine Care joint venture in Iberia and the sale of the bleach business in Italy. Approximately 70 basis points of the current year decrease were due to the net impact of favorable discrete adjustments related to uncertain income tax positions (which netted to 230 basis points in the current year versus 160 basis points in the prior year). An additional 250 basis point decrease relates to a favorable geographic mix of earnings and the timing of U.S. corporate tax law changes in the prior year.

Net Earnings

Net earnings attributable to Procter & Gamble decreased $629 million or 16% to $3.4 billion for the quarter. The decrease was primarily due to the non-operating items discussed above. Operating income was up marginally as the reduction in SG&A was largely offset by the gross margin contraction. Foreign exchange reduced net earnings by about $320 million for the quarter. Diluted net earnings per share decreased 15% to $1.18. The difference between the earnings per share and the net earnings declines was due to a reduction in number of shares outstanding. Core net earnings per share decreased 1% to $1.21. Core net earnings per share for the quarter represents diluted net earnings per share excluding incremental restructuring charges in both

periods related to our productivity and cost savings plan and the prior year gain on the buyout of our Iberian joint venture partner.

Foreign Currency Translation – Venezuela Impacts

Venezuela is a highly inflationary economy under U.S. GAAP. As a result, the U.S. dollar is the functional currency for our subsidiaries in Venezuela. Any currency remeasurement adjustments for non-dollar denominated monetary assets and liabilities held by these subsidiaries and other transactional foreign exchange gains and losses are reflected in earnings.

Through December 31, 2013, the Venezuelan government had established one official exchange rate for qualifying dividends and imported goods and services, equal to 6.3 Bolivares Fuertes (VEF) to one U.S. dollar. Transactions at the official exchange rate are subject to CADIVI (Venezuelan government's Foreign Exchange Administrative Commission) approval. Our overall results in Venezuela are reflected in our Consolidated Financial Statements at the official rate, which was the rate we expected to be applicable to dividend repatriations at December 31, 2013.

In addition to the official exchange rate, there are and have been parallel exchange markets controlled by the Central Bank of Venezuela as the only legal intermediary to execute foreign exchange transactions outside of CADIVI. Through February 12, 2013, the parallel exchange program was SITME, which had a published rate of 5.3. When the government devalued its currency in February, 2013, it also eliminated SITME, but established a new auction-based exchange rate market program, referred to as SICAD. Through December 31, 2013, the notional amount of transactions and regulations that has run through these programs has been limited, which essentially eliminates the Company's ability to access any foreign exchange rate other than the official CADIVI rate to pay for imported goods and/or manage our local monetary asset balances. Accordingly, all of our net monetary assets are measured at the official 6.3 exchange rate at December 31, 2013.

As of December 31, 2013, the Company had net monetary assets denominated in local currency of $1.2 billion. Local currency balances increased approximately 30% since June 30, 2013 due to earnings in Venezuela, an increase in the net amount of indirect value added taxes (VAT) receivable from the government from goods receipts and shipments, and a decrease in CADIVI payments.

On January, 24, 2014, the government made a number of announcements including the agreement that, effective immediately, dividend and royalties will be executed under the SICAD program. The most recent transactions executed through SICAD auctions have been at a VEF to U.S. dollar exchange rate of 11.4. Dividends and royalties were previously executed at the official exchange rate of 6.3. As a result of this announcement, we are gathering information to determine the magnitude of the non-core charge to revalue the local balance sheet positions. In addition, we are gathering information to estimate the ongoing financial impacts related to the translation of local financial statements and inter-currency operational transactions, such as the importation of finished products and raw materials.

The ongoing impact of this announcement and our ability to restore net sales and profit to levels achieved prior to the devaluation will be impacted by several factors. These include our ability to mitigate the effect of the price controls and recently enacted profit margin controls, any potential future devaluation of the official exchange rate, any significant increase in the liquidity of the parallel SICAD program that would give the company access to this mechanism, any change in the auction exchange rates in the parallel SICAD program, any further Venezuelan government price or exchange controls, economic conditions and the availability of raw materials and utilities. In addition, depending on the future availability of U.S. dollars at the official rate, our local U.S. dollar needs, our overall repatriation plans, the creditworthiness of the local depository institutions and other creditors and our ability to collect amounts due from customers and the government, including VAT receivables, we may have exposure for our local monetary assets. We also have devaluation exposure for the differential between the current and potential future official exchange rates.

RESULTS OF OPERATIONS – Six Months Ended December 31, 2013

The following discussion provides a review of results for the six months ended December 31, 2013 versus the six months ended December 31, 2012.

Net sales percentage changes are approximations based on quantitative formulas that are consistently applied.

* Other includes the sales mix impact from acquisitions/divestitures and rounding impacts necessary to reconcile volume to net sales.

Operating Costs

Gross margin contracted 100 basis points to 49.5% of net sales fiscal year to date. The decrease in gross margin was driven by a 130 basis point impact from unfavorable geographic and product mix behind disproportionate growth in developing regions, the Fabric Care and Home Care and Baby, Feminine and Family Care segments, and mid-tier products, which have lower gross margins than the Company average. The gross margin decline was also driven by a 90-basis-point impact from unfavorable foreign exchange. These were partially offset by manufacturing cost savings of 140 basis points.

Total selling, general and administrative expenses (SG&A) decreased 3% to $12.8 billion due to a reduction in restructuring and marketing spending. SG&A as a percentage of net sales decreased 130 basis points to 29.5%. Lower restructuring spending drove 60 basis points of the decline. Overhead productivity savings of 40 basis points and approximately 100 basis points of scale benefits from increased net sales on overhead and marketing spending were partially offset by an increase in wages primarily in developing regions.

Non-Operating Expenses and Income

Interest expense was $352 million fiscal year to date, an increase of $11 million versus the prior year period due to an increase in debt outstanding, partially offset by lower interest rates on floating rate debt. Interest income was $44 million fiscal year to date, an increase of $6 million versus the prior year due to an increase in cash, cash equivalents and investment securities. Other non-operating income/(expense) decreased $856 million to $48 million due to prior year acquisition and divestiture activities, including a $631 million holding gain resulting from P&G's purchase of the balance of its Baby Care and Feminine Care joint venture in Iberia and a $247 million gain from the divestiture of our Italy bleach business.

Income Taxes

The effective tax rate decreased 70 basis points to 22.7%. The prior year rate was reduced by 180 basis points due to the tax impacts on gains from the purchase of the balance of the Baby Care and Feminine Care joint venture in Iberia and the sale of the bleach business in Italy. An approximate 30 basis points increase was due to the net impact of favorable discrete adjustments related to uncertain income tax positions (which netted to 140 basis points in the current period versus 170 basis points in the prior year period). The remaining 280 basis point decrease relates to a favorable geographic mix of earnings and the timing of U.S. corporate tax law changes in the prior year.

Net Earnings

Net earnings attributable to Procter & Gamble decreased $416 million or 6% to $6.5 billion fiscal year to date. The decrease was due to the reduction in non-operating income, which reduced earnings by approximately 9%. Operating income increased 3% due to the increase in net sales and the reduction in SG&A, partially offset by the gross margin contraction. Foreign exchange reduced net earnings by about $570 million fiscal year to date. Diluted net earnings per share decreased 6% to $2.21. Core net earnings per share decreased 1% to $2.26. Core net earnings per share represents diluted net earnings per share from continuing operations excluding incremental restructuring charges in both periods related to our productivity and cost savings

plan, charges for European legal matters in the prior year period, and the gain on the buyout of the Iberian joint venture in the prior year period.

BUSINESS SEGMENT DISCUSSION – Three and Six Months Ended December 31, 2013

The following discussion provides a review of results by reportable business segment. Analyses of the results for the three and six month periods ended December 31, 2013 are provided based on a comparison to the same three and six-month periods ended December 31, 2012. The primary financial measures used to evaluate segment performance are net sales and net earnings. The table below provides supplemental information on net sales and net earnings by reportable business segment for the three and six months ended December 31, 2013 versus the comparable prior year periods (amounts in millions):